need. Currently they are trying to persuade this committee it is necessary to impose mandatory legislative limitations on petroleum imports-through quotas, tariffs, or both.

They base their arguments on three main premises: (1) Volume of imports injures the domestic producer; (2) voluntary controls have failed; (3) the domestic producer is threatened with ruin. As I see it, none of these allegations is true. The domestic producer is having a tough time of it, but the cause comes from internal economics and United States Government statistics will prove this contention. My testimony to this committee will show that continued importation of petroleum at flexible levels is essential to our economic welfare and to our national defense. Supporting evidence will not be in terms of transitory fluctuations but in long-term trends, so that the matter may be viewed in its proper perspective. I shall make the following points:

1. The decline in oil well drilling activity, about which you have heard so much, is an economic reality that began not recently but 20 years ago, before imports became a significant factor. Thus, which United States drilling is at its lowest ratio to producers' gross income in over two decades, the curve has formed a vertical plateau for the past 10 years.

2. By any economic yardstick-barrels per producing well, barrels per hole drilled, or barrels per foot drilled-the United States discovery trend shows that less new oil can be found for any intensity of drilling effort.

3. The law of diminishing returns cannot be repealed, and we are faced by the fact the United States has for ages met 65 percent of the world's petroleum requirements from about 15 percent of the world's proven reserves. This cannot be continued. Meanwhile, historic and current levels of oil imports have not been detrimental to the search for and discovery of new domestic oil reserves-but the incentives for such capital risk are reduced.

4. The effect of oil imports on the parlous condition of many domestic producers has been overstated. Their outcry, their panic, has been induced by fear of injury that might be, rather than significant loss of business. What actually has happened is that their percentage share of a growing hydrocarbon energy market has been reduced. Their volumetric sales are not adversely affected, and their actual gross income is rising. Since their costs are rising even more rapidly, however, they seek by all means to ease the pressure of this economic vise in which they are gripped.

5. The constant stress on the dramatic reductions in "allowable production days" in Texas has not been conducive to clear understanding of the picture in that State. United States Bureau of Mines statistics on overall oil output in Texas over the past half-dozen years during which, as you were shown, the allowables themselves have been reduced-record a continued maintenance of actual levels of production up to recent months. In fact, last year's production was the second highest in the history of the State's petroleum industry.

6. The charge that voluntary controls of oil imports have failed is wholly unfounded.

7. The rate of expansion of the domestic oil-producing business has slackened not solely due to imports, as has been alleged; rather, it results from the overall business recession which has reduced the demand for all fuels below expectations, and primarily due to impact of competitive fuels from domestic sources.

8. If all oil imports were totally excluded from the United States-and had been excluded from the very beginning when the IPAA opposed them 30 years ago the resultant additions to the sale of domestic crude would not have been sufficient to alter the fact that today petroleum is losing ground to other fuels (as coal did, before it). Oil's chief competition is from natural gas and gas liquids. Tomorrow, nuclear power may prove a significant factor.

9. The domestic petroleum industry's need is new incentives to encourage it in the economic race, not crutches in the form of imports controls that in the long run will slow it down.

THE MODEST DECLINE IN DOMESTIC DRILLING, AND ITS CAUSES

It is unfortunate that a few single-minded people have been encouraged to broadcast their condemnation of imports as being solely to blame for today's problems of the United States oil producer. In so doing-in seeking to sacrifice this scapegoat they turn their eyes away from the real underlying factors in the producers' dilemma. If these factors are only recognized, remedial action might be possible but curtailment or even complete cessation of oil imports will no more eliminate their handicaps than were the sins of our Biblical forbears washed away by the blood of sacrificial goats.

The domestic producers real problems lie in the narrowing margins between revenues and costs, resulting in part from general inflation of the price of equipment, materials and services, as well as rising wage levels; in part by the invasion of oil markets by domestic natural gas and gas liquids; and mostly because of the steady decline of the physical returns on his investment of time, money and discovery genius. Fortunately, the poorer rate of oil discovery has been mitigated by improved value of the accompanying natural gas products.

Vast strides have been made in the technique of oil discovery, but with every oilfield found by the drill there is one less remaining to be found. Statistics covering the past decade, especially, make it quite clear the law of diminishing returns is fast enforcing its mandate. The opening up of the promising potential of the offshore Continental Shelf submarine lands for prospecting a number of years ago can slow down but not halt this trend.

Here, if you will, is a most serious problem. It is a disenheartening thought to realize that whereas each foot of hole drilled 10 years ago added 31.2 barrels of oil to our reserves, today the returns per foot amount to only 11 barrels, or about one-third as much. Our discovery rate per hole drilled is not quite so bad, although it still makes poor showing at somewhat better than 45,000 barrels of new reserves per hole drilled last year, compared with more than double that figure, at 108,000 barrels, in 1948. Similarly, taking only into consideration the successful oil wells, 10 years ago the average producer provided us with over 192,000 barrels of new reserves, but in 1957 the average discovery was equivalent to substantially less than 89,000 barrels. It is selfevident that these adverse factors are pyramiding-drilling costs and overheads have gone up, wells have to be drilled deeper, and the returns on investment are diminishing.

Crude oil reserves developed in the United States in relationship to drilling effort

1 Additions to reserves resulting from discovery of new oilfields, new pools in old fields, extensions of known fields, and revisions of previous estimates. Data compiled under the auspices of the American Petroleum Institute.

* Includes oil wells, gas wells, distillate wells, water-flood wells, other service wells, and all dry holes.

1 With which I dealt in great detail in a letter reproduced in the record of the recent House Ways and Means Committee hearings on this bill, and which is herewith summarized by exhibits V through VII.

27629 0-58-pt. 1- -47

It has been alleged by spokesmen for the domestic producers that rising levels of oil imports are the direct cause of current drilling effort being at a lower level than they have been for several years. There may have been some psychological influence along such lines, but the poor discovery rate has been the primary factor-not imports. Some 50 congressional investigations in the past 30 years have absolved oil imports from having any harmful effect on our domestic industry, and it is only this past 18 months that the Government has considered it desirable to put so much as a restraining hand on the importers. Yet, analysis of the record shows that domestic producers' enthusiasm for reinvesting in new wells actually went on the skids over 20 years ago, and leveled off on a plateau for the past decade.

Domestic producers have charged that imports are reducing their income, so they no longer can afford to drill more wells. This does not jibe with the fact that United States drilling is at its lowest ratio to producers gross income of

any time since 1937, and its precipitate descent to this 10-year plateau preceded the significant rise in imports. Therefore, imports cannot be held economically responsible for the reduced drilling rate in this country. The previously mentioned aspect of poorer returns on investment is more logically a primary factor.

The decline actually has been short-lived, and is one of those temporary dips which inevitably occurs in any phase of the economy of a nation. Comparable or greater dips have occurred in other peacetime years in 1938 and 1939, for example, and in 1949 and have been followed by climbs to new peak levels. This is history repeating itself, for when the number of wells drilled and the growth in United States reserves are charted against imports over the past 33 years (exhibit III), it is self-evident that rising imports have not adversely affected these growth curves.

100

RISING IMPORTS DON'T RETARD
INTENSITY OF DRILLING EFFORT
OR GROWTH IN PROVEN

OIL RESERVES

U.S. RESERVES

20

MILLIONS OF BBL.

EXHIBIT III

The reduced incentive to invest the larger sums now necessary for domestic oil exploration, due to poorer returns on such investment, is a primary factor for such decline in our drilling rates as has taken place. Wipe out imports entirely, and you still are faced by the law of diminishing returns from drilling within our borders. I might go so far as to say that the rising trend of imports has been the result of diminishing intensity of domestic oil operations, rather than the other way around as has been alleged.

WHERE THEIR INCOME HAS BEEN GOING

The fact that domestic drillers are drilling fewer wells per million dollars of income should not be mistaken for an indication of excessive profits being made on their crude oil sales. In the first place, I specified gross income and I previously have made the point that their wells are costing them much more today than they did in the past, as well as other higher costs of operation. In the second place, many of them are spending just as much as ever on exploration-perhaps even more-but it is not all spent in the United States. Even some of the most vocal of the anti-imports group are hedging their bets by undertaking costly exploration programs in foreign lands. This is as it should be. In fact, we have urged them to do so for the past 11 years, for the United States cannot long continue to supply more than 60 percent of the world's petroleum requirements from only 15 percent of the world's proven reserves. It has been our conviction that if they make good profits abroad, they can afford to take bigger investment risks at home than otherwise would be the case. We have argued against their opposition to the importers, "You can't beat 'em, so join 'em." For a long time they closed their ears to the gospel, but today they are getting religion on a gratifying scale. It is the initial successes of a number of these independents who have gone abroad and has served

to swell the ranks of the importers whom their fellow independents oppose in traditional fashion-until they, too, have foreign oil to import.

Two or three years ago there were hardly more than 2 dozen independent United States oil producers operating outside the North American Continent. Today the picture is far different. Some 9 months ago we compiled and published a list of 223 independent American oil operators engaged in exploration and development programs in 51 countries outside the United States (exhibit IV, Trends survey, "How the Rapid Spread of Independents Into Foreign Operations Affects the Global Oil Industry-And Who Are the New International Operators"). Already this number has grown well past the 250 mark, and there is no letup in sight.

This sudden enthusiasm for overseas operations has stemmed directly from the poor discovery potential in the United States. As yet there is no survey as to just how much these companies are spending abroad-but, I assure you, foreign operations are far more costly than domestic. But, since the risks are far less in virgin and semiproven territory than in our lands that have been worked over and over again, these operators have concluded that they stand to get a much better return on their risk-capital abroad than they will if they restrict themselves to prospecting at home in depleted areas. As stated before, profitable foreign operations will enable them to do more at home, paradoxical as it may seem.

This thought is a sound one, and there is a measure of proof that it works out. Traditionally most of our drilling has been done by the independent producer and most of the production, too. But the major companies have been assuming an increased burden in this regard. They are doing most of the geophysical exploration in this country today--and by major companies, I mean the principal importers. As is traditional, a large part of their exploration acreage they farm out to independents for prospecting with the drill, but even so their own share of the drilling activity is rising. According to an esteemed contemporary,' the 22 largest producing companies (15 of which are important importers) drilled 11,709 wells in 1955, or 21 percent of the total that year, were credited with 21.7 percent of the 1956 holes, and last year they accounted for 12,028 wells, or 22.5 percent of the Nation's total. So much for the argument that growing imports result in the importers drilling fewer wells in the United States. Instead, their economies with imported oil to supplement their domestic sources has enabled them to do a better job at home.

So it should prove to be with regard to the two hundred-fifty-odd independent domestic producers who now have branched out into the field of foreign operations.

Not only is the development of United States-operated petroleum resources abroad good business, but it is a sound step for the United States national economy. Our resources have been depleted at a pace that could not, and should not, be maintained. Something must be kept by for abnormal conditions, such as when hostilities or political factors might cut off some other sources of supply.

You have, of course, been told with great intensity of conviction that "There is no defense in foreign oil," and how so many tankers carrying oil were sunk off our shores during World War II. Perhaps you were not told, however, that most of those oil-carrying ships were not bound for the United States— they were carrying oil to our fighting forces overseas. Yes, the traffic was in the other direction! Nine out of every ten tons of supplies sent to our Armed Forces in Europe during the war comprised petroleum products. With the stupendous consumption of jet aircraft, this ratio may be worse in the event of World War III-which nobody but a defeatist would expect to fight on our own shores.

Fleet Adm. Chester W. Nimitz said that World War II was won with "bullets, beans, and oil." Who would deny that this will be even truer of the next war? In this connection, we observed in an editorial commentary in the February issue of our journal that

"Defense of our shores is now extended to a widespread perimeter which will require enormous oil resources to maintain, all of which must be moved by tanker. The slogan 'there is no defense in foreign oil,' based on the vulnerability of tankers bringing oil to our shores in time of war, loses its validity when it is realized that oil will have to be shipped by tanker in any event to maintain our foreign military bases. Whether the tanker is headed north, south, east or

" World Oil.